Litigation: Is your new dream job a non-compete nightmare?

Here are your options if you’re stuck in with an unreasonable non-compete agreement with your soon-to-be-former firm

On your first day at new-hire orientation your company asked you, like they do all in-house lawyers, to sign a non-compete agreement with a non-disclosure clause, and a no-raid provision. It also includes financial penalties if you leave before a certain time. Without thinking much about it, you signed it along with all the health insurance, 401k and other paperwork they put in front of you. Now, out of nowhere, your company’s competitor recruited you to come over there for more money, a better title and a better quality of life.

Are you stuck? Can you make that move if you’ve signed a non-compete?

While only a handful of jurisdictions have directly considered this issue, they are uniform in determining that ethics rules prohibit the application of direct non-compete agreements to in-house lawyers – with a few caveats. Some of the indirect non-compete provisions, such as the non-disclosure clause and the financial penalties, may be enforceable depending on the jurisdiction.  

Non-Competes and In-House Counsel

Rule 5.6(a) of the ABA Model Rules of Professional Conduct prohibits agreements imposing restrictions on a lawyer’s practice after the relationship is terminated. The Rule seems to contemplate law firm practice, but it has been consistently construed to include in-house counsel. For example, see the New Jersey Advisory Committee on Professional Ethics, Opinion 708: “The fact that the restrictive covenant agreement in question arises in the corporate context, rather than within a law firm, is of no moment.” Although this Rule benefits the lawyer seeking subsequent employment, its purpose is to give clients maximum freedom to select the counsel of their choice by removing interference from contractual arrangements. When opining on specific agreements, ethics committees pay close attention to this policy goal and permit restrictions only where client choice is not infringed.

Connecticut and Washington state allow non-competes for lawyers, where they contain a “savings clause” that limits the restriction to employment other than the future practice of law, and only to the extent permissible under their equivalent of Rule 5.6(a). As a practical matter, assuming the non-compete is otherwise enforceable. It would not restrict your ability to move from one in-house counsel position to another, but it could restrict your ability to move to a non-legal position, such as chief operating officer or another position on the business side. The ethics opinions do not give good guidance on whether your non-compete could be enforced if you were to take a position, for example, in a compliance department or other job where legal training is considered helpful, but not a requirement.

No-Raid Provisions

A standard provision in non-competes is that the former employee agrees not to solicit other employees to follow her to the new employer. These agreements have been held to be invalid for lawyers because, as the New Jersey Supreme Court observed in Jacob v. Norris, “The practice of law also involves seeking the best services for one’s clients.” So, when you get offered that dream in-house counsel job across the street, you will likely be able to ask your secretary or paralegal to jump ship with you.

Non-Disclosure and Confidentiality Agreements

The enforceability of the non-compete itself is relatively black and white. However, the enforceability of non-disclosure agreements for lawyers is a gray area. American Bar Association opinions take the position that the confidentiality provisions of Rule 1.6 provide more than adequate protection for the former employer/client. However, the Rule defines confidences as “information relating to the representation of a client.” In reality, an in-house lawyer could learn confidential information about his employer outside of the context of the representation of the employer or while performing non-legal duties within the scope of his employment.

The N.J. Advisory Committee opinion recognized that fact and conceded that under appropriate circumstances, it could be acceptable for a corporation to request its outgoing lawyers to sign a non-disclosure or confidentiality agreement, only if the agreement does not restrict the lawyer’s ability to practice law in the future or expand the duties of confidentiality beyond the requirements of Rule 1.6. Your best approach is to reach an understanding with your soon-to-be former employer about the expected scope of client confidences you learned, as well as the scope of confidential information and/or trade secrets you obtained, and clarify expectations about preserving both. The non-disclosure agreement you reach cannot be used to prevent you from taking another in-house counsel position, but it could create problems if you transition to a non-legal role.

Model Rule 1.9 imposes some additional non-disclosure restrictions, regardless of whether you have a confidentiality agreement with your previous employer. Rule 1.9 relates to duties to former clients, and prohibits lawyers from representing another person in the same matter or a substantially related matter, or use information relating to the former representation to the disadvantage of a former client. Your ethical obligations to your former employer may not keep you from going to work for a competitor, but they could prevent you from working on certain matters.  

Financial Penalties

The discussion of the previous types of agreements may give you the impression that no restrictive covenants are enforceable against departing lawyers, but that is not the case.

Other agreements will require you to suffer financial penalties of varying kinds. In the law firm lawyer context, an outgoing lawyer may forfeit stock in a professional corporation or lose retirement benefits if she goes into practice and competes with her former colleagues. In-house counsel are more likely to lose options, restricted stock or unvested contributions to retirement accounts. Penalties that simply result in the loss of some money do not impose restrictions on the lawyer’s ability to practice law after terminating his employment, according to ethics committees in Arizona and California. If your employment agreement contains these types of provisions, you should expect to incur the penalties.

Conclusion

While the cases and opinions analyzing restrictive agreements for departing lawyers are fairly consistent across jurisdictions, it is important to remember that fewer than 10 jurisdictions have clear authority on the issue. Depending on where you work, you stand a decent chance of creating law in this area. If you signed any kind of restrictive agreement, you should consult with a lawyer to make sure you are making your move the right way and are not accidentally initiating a showdown between your current and former employers.

Contributing Author

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Brian Esser

Brian Esser, associate at BakerHostetler LLP, focuses his practice on complex and general civil litigation and corporate investigations. He primarily works in the area of...

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